Question

In: Economics

1.Aggregate demand curve of an economy is given by AD = 51 - 0.2P, the long-run...

1.Aggregate demand curve of an economy is given by AD = 51 - 0.2P, the long-run aggregate supply, LRAS, is 30 and the short-run aggregate supply is given by SRAS = 0.3 P (all output measures are in US$ billions and the price level is given as an index number). What is the output gap as a percentage?

2.Aggregate demand curve of an economy is given by AD = 51 - 0.2P, the long-run aggregate supply, LRAS, is 30 and the short-run aggregate supply is given by SRAS = 0.3 P (all output measures are in US$ billions and the price level is given as an index number). What could be the unemployment rate if the natural rate of unemployment is 4%?

3. Aggregate demand curve of an economy is given by AD = 51 - 0.2P, the long-run aggregate supply, LRAS, is 30 and the short-run aggregate supply is given by SRAS = 0.3 P (all output measures are in US$ billions and the price level is given as an index number). Assume that the present status of the economy is the result of a demand shock. What should be the original price level when the economy was in equilibrium?

4.Aggregate demand curve of an economy is given by AD = 51 - 0.2P, the long-run aggregate supply, LRAS, is 30 and the short-run aggregate supply is given by SRAS = 0.3 P (all output measures are in US$ billions and the price level is given as an index number). Assume that the present status of the economy is the result of a demand shock. What should be the price level when the labor market adjusts and the economy will be in an equilibrium?

Solutions

Expert Solution

1.

Aggregate Demand:

Short-run aggregate supply:

At the short-run equilibrium:

Therefore,

Then the output gap is

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2.

By Okun's law every percentage point deviation of the unemployment rate from the natural rate, there will be a 2 percentage point output gap. That is by Okun's Law

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3.

If this is due to demand shock then at previous long-run equilibrium,

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4.

If the gap is due to demand shock at new long-run equilibrium

Rahul Sunny answered 8 months ago
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